Dear clients, friends and family:
Following is the 2014 first quarter net performance information for CMG’s Tactical Investment Strategies along with our thoughts on each strategy over the past quarter. In addition, we have provided the net performance for the CMG Managed Blends and the CMG Classic Blends. We have also reflected the net performance for our tax-deferred variable annuity tactically managed programs. Market index performance is presented at the bottom of the chart.
Within the total portfolio construction process, we believe it is important to include a number of non-correlating risk diversifiers (equity, fixed income and tactical exposure), that performance evaluation should be considered over a three to five year period vs. months and quarters, and that one should compare equity performance against an equity benchmark, bond against a bond benchmark and tactical against a tactical benchmark. Asset classes are non-correlating for a reason and should be viewed from that perspective. Of course, past performance does not predict or guarantee future returns.
* Please note all strategy returns are reported net of a 2.50% management fee.
CMG Tactical Fixed Income Strategies
The CMG Managed High Yield Bond Program (“CMG HY”) returned +0.52% for the first quarter, net of fees. The same strategy managed inside the Jefferson National Tax-Deferred Variable Annuity returned +0.82% for the first quarter, net of fees. CMG HY traded several times during the quarter as a result of the volatility in the high yield bond market. CMG HY began the year in cash and traded into high yield in early January. The strategy made several trades during the quarter, from cash to long bonds and back to cash, before finishing the quarter fully invested in a long bond position. High yield bond prices remain strong to start the year as investor demand for yield, low projected default rates and low levels of new issuance continue to support prices. The default rate remains at a five year low of just 1.7% and is expected to remain near these lows at this point in the credit cycle. New issuance is down with year to date volume at $82 billion, 17% lower than the $100 billion over this period a year ago. Although tight supply is supporting prices, institutional managers, such as flexible bond funds, are finding value elsewhere and are reducing their high yield exposure. The challenge for high yields will be when the credit cycle turns and interest rates start to rise. The ability for leveraged companies to refinance could be impaired in that type of environment. We do not see that happening in the near future as the Fed is still in the midst of winding down its bond buying program. Most estimates, assuming no exogenous shocks, have the Fed winding down QE by the end of 2014 or early 2015. A rise in short-term rates is not even on the radar at this time and it might take a shift in Fed policy for high yields to reset to lower prices and higher yields.
CMG Tactical Equity Strategies
The CMG Opportunistic All Asset Strategy (“CMG Opportunistic”), our broadly diversified mutual fund and ETF allocation strategy, returned +0.45% for the first quarter in the TCA (Trust Company of America) portfolio, +2.26% in the TDA portfolio and -0.13% in the ETF portfolio, net of fees. The Jefferson National Tax-Deferred Variable Annuity portfolio returned +1.87% for the first quarter, net of fees.
The strategy began the first quarter allocated approximately one third to fixed income and two thirds to diversified equity positions including allocations to telecom, small cap stocks and international large cap stocks. The allocation to fixed income mutual funds in January and February offset declines in the portfolio’s equity allocations. By the end of the quarter, the equity positions in the portfolio had rotated from higher beta positions to more defensive allocations in utilities and healthcare, with the ETF portfolio tilting more heavily to fixed income. For a snapshot of current allocations and changes to each portfolio over the past month, please visit our website at the following links to view the monthly update for each portfolio: TCA, TDA, ETF, and Jefferson National.
The Scotia Partners Dynamic Momentum Program (“Scotia Dynamic”) returned +1.39% for the first quarter, net of fees. Scotia Dynamic’s model remained in a bullish trend for the entire first quarter. In January, the strategy was allocated to biotech, electronics, healthcare and precious metals but also maintained a larger cash balance than its historical average, preventing as deep a drawdown as the broader equity markets. Equity markets rebounded in February and the strategy was able to outperform with overweight allocations to precious metals, electronics, small caps and transportation. The strategy declined in March as allocations to electronics, small caps and transportation detracted from performance.
The CMG Tactical Rotation Strategy (“Tactical Rotation”) returned -1.66% for the first quarter, net of fees. Tactical Rotation was 100% invested in equities to start the year with a 50% allocation to the S&P 500 (SPY) and 50% allocation to the MSCI EAFE ETF (EFA), the same allocation it held in December. In February, the strategy reallocated its EFA position to bonds for the first time since August 2012. Tactical Rotation was allocated 50% to the S&P 500 (SPY) and 50% to the Vanguard Total Bond Market ETF (BND) for the month. In March, the strategy reallocated out of bonds into REITS while maintaining its 50% exposure to US equities. For March, the strategy was invested 50% to the S&P 500 (SPY) and 50% to the Vanguard REIT Index ETF (VNQ). After a difficult year in 2013, REITS were rebounding after a big sell-off in mid-2013 in response to the spike in interest rates. As bond prices rose and rates declined in the first quarter, REITS benefited, showing positive momentum that has continued into the second quarter. Tactical Rotation began the second quarter allocated 50% to VNQ and 50% to BND.
CMG Tactical Long / Short Strategies
The Scotia Partners Growth S&P Plus Program (“Scotia”) returned +1.38% for the first quarter, net of fees. Scotia performed well during the quarter generating positive returns from both long and short trades. For the quarter, the strategy generated 15 total trades, 12 of which were profitable and 3 that were not. The long-term trend indicator for the strategy was bullish for the entire quarter generating primarily long trades during the quarter, with 14 out of the 15 trades being long trades. However, the intermediate-term indicators turned bearish several times and during periods when the strategy’s long- and intermediate-term trends are in disagreement, the strategy remains in cash. There were several periods during the quarter when this was the case, primarily due to short- to intermediate-term volatility.
The System Research Treasury Bond Program (“SR”) returned -9.99% for the first quarter, net of fees. SR started the year in a short bond position with the expectation that bonds would continue to sell off and rates would rise. Interest rates rose significantly in the fourth quarter and appeared to be set to rise further to start 2014 as the Fed continued to taper its bond buying program. While a spike in rates was not expected, most market observers would not have predicted that the 20-year Treasury yield would drop from 3.91% at the start of the year to 3.60% at the end of the quarter. Against this backdrop, the strategy moved to a long position at the end of January as several model indicators pointed to lower inflation and higher bond prices moving forward. The strategy remained long for the entire month of February generating a positive return. March again proved challenging for the strategy as several of the strategy’s models flipped from long to short trades during the month causing the strategy to be whipsawed. SR finished the quarter in a long bond position.
Conclusion
Despite reaching new all time highs, equity markets were volatile during the quarter in reaction to geopolitics, macroeconomic factors and central bank activity. In particular, a renewal of Cold War animosity and the annexation of Crimea by Russia were, and remain, a geopolitical specter hanging over the markets. Additionally, economists argued over the impact of winter weather in the US on economic indicators, many of which indicated the US economy was tracking at a weaker level in the first quarter than expected. Finally, Janet Yellen and the Federal Reserve have provided mixed signals during recent commentary. Although acknowledging that recent economic performance has been better (namely the rebounding housing sector and auto industry), the employment market still appears to be struggling. Recent comments in April by Ms. Yellen were meant to clarify a speech she gave at her first news conference which suggested the Fed might consider lifting rates as soon as mid-2015. While GDP estimates point to an ongoing recovery, a nascent job market recovery remains a concern for the Fed – hence the mixed signals.
To further confound market observers, the ongoing taper of the Fed’s bond buying program has actually been met with lower interest rates and higher bond prices. Considering that the single largest buyer of US Treasury Bonds is signaling a slower rate of acquisition, most analysts expected rates to stay steady or rise. Equity markets are heading towards a historically difficult seasonal period. “Sell in May and Go Away” is the old adage. Weak investment flows and low trading volumes characterize the period from May to October. It has been a good run for equities but valuations, particularly in tech stocks, are stretched and the equity bull market run is long overdue for a correction (10% decline or more).
With kind regards,
PJ Grzywacz
President & CCO
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. (or any of its related entities-together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Performance Disclosure: Performance results from inception to the present are net of the current advisor fee for the program, 2.50%, paid quarterly in arrears. Performance is not net of custodial fees. The performance results shown include the reinvestment of dividends and other earnings.
Hypothetical Presentations:
To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model.
Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
CMG Global Equity Fund, CMG SR Tactical Bond Fund and CMG Tactical Futures Strategy Fund: Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Global Equity FundTM, CMG SR Tactical Bond FundTM and the CMG Tactical Futures Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456 (1-866-264-9456). Please read the prospectus carefully before investing. The CMG Global Equity FundTM, CMG SR Tactical Bond FundTM and the CMG Tactical Futures Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).